Charities frequently use their money in ways that benefit for-profit companies, and there is nothing inherently wrong with that: take, for instance, a soup kitchen buying supplies from a for-profit grocery store.

But charities can run into trouble if they are steering funds toward people or companies that have a role in running that charity—a prohibited practice known as self-dealing. A charity could theoretically have a good, charitable reason to, say, buy a portrait of Donald Trump, but when the purchasing charity is run by people associated with the Trump businesses, and these very same for-profit companies benefit from the acquisition, the purchase itself raises a reasonable suspicion of self-dealing, as the Washington Post explained.

This question of self-dealing is what arose when The Century Foundation (TCF) discovered that a number of for-profit colleges have established charities to give tuition scholarships to their own students. As a general matter, it would be well within the legal constraints placed upon nonprofit organizations for a charity to subsidize the cost of attendance for a student at an institution of higher education, regardless of whether that school is for-profit, nonprofit, or public. But if that charity is run directly or indirectly by a for-profit school, and these scholarships steer business back to that very same school, it raises the question of whether the charity is operating exclusively for educational or charitable purposes, as required by the IRS and most state charity laws.

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TCF has identified ten for-profit schools (listed below in Table 1) that are affiliated with charities whose sole purpose, according to documents filed with the IRS, is to give scholarships to students at that school.1

*Bob Jones University is classified as a for-profit entity by the United States Department of Education, but is registered in South Carolina as a nonprofit corporation. This discrepancy is likely the result of the school’s history. Bob Jones lost its nonprofit, tax-exempt status as a result of a 1983 Supreme Court decision in which the Court ruled that the IRS could revoke the tax-exempt status of a religious university whose practices were contrary to a compelling government policy, such as eradicating racially discriminatory policies.

Company-affiliated foundations can be good entities through which businesses can demonstrate their commitment to a community or to a cause. But if the cause is themselves, they should take a close look that they are not crossing the self-dealing line, because if only for selfish reasons, a violation can be costly. In 2013, New York Attorney General Eric Schneiderman charged that Pearson, the education publisher, had used the Pearson Charitable Foundation “to promote and develop for-profit products.” The action led to a $7.7 million settlement and dissolution of the foundation.

Based on my interactions with the directors of these scholarship funds, some seem to have simply been unaware that operating a charity for the benefit of a particular business can raise red flags. It seems okay to them because they are aware of scholarship foundations affiliated with traditional universities. But that’s different: a government or charity can have a charity steer money back to itself because, if all of the entities are legally committed to a public purpose, there are no owners steering money to themselves. That is not the case when a for-profit entity creates a charity to buy or promote its product.

Why did these schools create nonprofits to manage their scholarship funds? Maybe, in some cases, the school sees the affiliated scholarship program as a potentially useful tool, if the school itself decided to convert to a nonprofit. For example, in the case of the Herzing University conversion, the former owner did exactly that, using a scholarship foundation as the nonprofit vessel to contain the school’s operations. Career Education Corporation served as another example of this when it raised the possibility of a nonprofit conversion to escape regulatory scrutiny, said “we currently have a nonprofit entity that could be used in such a transaction.”2 It seems likely that the school’s executives were referring to the scholarship foundation since it is the only nonprofit organization associated with the school network.

These schools might also be taking advantage of their affiliated scholarship funds is to evade the federal 90–10 Rule, which bars for-profit colleges from getting all of their funds from federal student aid programs. If a school is right up against that 90 percent for any given year—as is the case with Coyne College, for example—it might try to source a portion of tuition revenue from the separate organization and claim it as part of the 10 percent required to be from sources other than these U.S. Department of Education programs.3

Seeking to help students pay for college is laudable. A for-profit that wants to use its own money to accomplish that can cut the price, or offer institutional scholarships—there is no need to funnel money through a separate foundation. If the company wants to encourage donations by people who want a tax deduction, then an alternative approach would be to point them to an independent scholarship provider not run by the company.

Notes

In response to requests for comment, the Eastwick Foundation’s Executive Director Jeanne Patrican refuted that the organization only gives money to students enrolled at institutions owned by Eastwick Education. Patrican said that while the Foundation “provides the majority of its scholarships to students studying at institutions operated by Eastwick Education… it also provides scholarships to students studying at other institutions.” This marks a transition from the organization’s original pool of scholarship recipients, as outlined in its 2011 application for nonprofit recognition, which was limited to students enrolled at these particular for-profit institutions. According to Frank Orga, president of The Education Foundation, the organization is in the process of opening up its scholarship opportunities to students beyond those enrolled at EDMC-owned schools.

Career Education Corp earnings call, November 6, 2014.

Responding to a request for comment, Tom Babel, vice president of regulatory affairs at DeVry Education Group and a board member of Devry Education Group Scholarship Fund, said that the school does not include tuition revenue derived from the Scholarship Fund when calculating the total amount of revenue derived from non-governmental sources for the purposes of the 90-10 Rule.